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Hotel-room boom makes discounts scarce

Tried finding a great rate on a hotel room at the last minute lately?  Good luck. Analysts say thanks to a strengthening economy, business travelers are hitting the road again in droves. And just as demand seems to be picking up, the supply of rooms remains tight.  By's John W. Schoen
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Tried finding a great rate on a hotel room at the last minute lately?  Good luck. Analysts say thanks to a strengthening economy, business travelers are hitting the road again in droves. And just as demand seems to be picking up, the supply of rooms remains tight.

That means the lodging industry is set for its best year since 9/11 — and travelers are scrambling.

On Thursday, Marriott International Inc., the biggest hotel operator in the U.S., said its first-quarter profits rose 27 percent. The company credited an upswing in travel that has dirven room rates and occupancy higher. Marriott said it expects that growth in demand for rooms to continue and raised its earnings forecast for the rest of the year.

“Hotel rates are going up quite significantly — right now on a year-over-year basis they’re up about 7 or 8 percent,” said Susquehanna Financial Group lodging analyst Robert LeFleur. “You go to any big city right now and try to get a last-minute room on a Tuesday, Wednesday or Thursday, you’re going to be in pretty tough shape.”

Analysts say those higher weekday bookings are a sign that business travelers — grounded by tight corporate travel budgets follow the post-9/11 economic slump — are hitting the road again.

But while road warriors are back crisscrossing the country again, the numbers of rooms out there isn’t keeping up with demand. The hotel industry typically adds new rooms at the rate of around 2.5 percent a year, according to Jan Freitag at Smith Travel Research, which tracks room rates and occupancy. But over the past year and half, capacity has grown at only about half that rate. The result: If you don’t book in advance for popular destinations, you may locked out.

Higher occupancy and room rates will eventually spur construction of new hotels, say analysts. But it will take at least another year or two before those added rooms are available. And in some bigger cities, the process of developing a new hotel can take even longer.

‘Sitting pretty’
“So for the time being, if you’re a hotel, you’re sitting pretty,” said Freitag. “And if you’re a traveler, you’re paying the premium.”

A weak dollar is also drawing more overseas travelers to major cites like New York and Los Angeles. But while hotel rates are rising overall, the rebound has not hit all destinations — so there are still hotel bargains to be found.

“Recoveries tend to start on the coasts and work their way in, and this recovery is no different,” said LeFleur. “So New York is a much stronger market than, say, Chicago.”

A recent survey by AAA found that Hawaii is the most expensive destination — costing an average of $518 a day for food and lodging for a family of four. Other hot spots cited in the survey include Washington DC ($441), New York ($307) Rhode Island ($307) and Massachusetts ($303.) But travelers to the American heartland can still stay cheap in places like Nebraska ($184), North Dakota ($185), Kansas ($186), Oklahoma ($188) and Iowa ($189)

Higher gasoline prices could keep summer travelers closer to home: About half of travelers who stay in hotels get there by car. But for those who fly, higher hotel rates still haven’t eaten up what they're saving on the cheaper seats that are still available for many destinations, according to LeFleur. Airfares are still down 24 percent compared to peak in the early 2001 peak, he said. So based on and an average trip of 1000 miles each way and a two-night hotel stay, he figures the average overall trip cost is still 14 percent below where it was at the beginning of 2001.

As room rates have risen and bookings have gotten tighter, the hotel industry has been trying to sell more rooms directly and rely less on discount sales through third party Web sites like Expedia and Travelocity. Those third party sites charge hotels a commission of as much as 30 percent of the room charge, according to a recent report by KPMG International.

“The collective brain power of the hotel companies over past two years has gone toward wrestling share back form the third party channels,” said LeFleur. “You see a company like a Marriott or Starwood or Hilton, these major guys — over three-quarters of their Internet room sales aren’t going over the third party channels. They’re going over their own proprietary sites.”

To keep traffic headed to their own Web sites, hotel chains continue encourage repeat traffic with reward point programs — which aren’t always available to travelers who book on a third party site. And to encourage direct sales, major chains are offering “best rate” guarantees — promising to match any rate available on a third-party site.

Broken promiseBut a recent survey of 330 hotels in 16 countries by the accounting firm KPMG found that some three-quarters of all hotels fail to deliver on Web price guarantees. Though 43 per cent of hotels offered "best price" guarantees, only 27 per cent of them delivered. Cheaper room rates were quoted by indirect channels 58 percent of the time, according to the survey.

Though online bookings are growing, the majority of those are direct bookings made on hotel Web sites, KPMG said.

To reduce their reliance on discounted room bookings, third-party travel sites have begun broadening their offerings to include tickets to local attractions and events at destination sites.  Travelers who don’t care which brand of hotel they stay in are still coming to travel sites to comparison shop, said Nicole Hockin, a spokeswoman for

“They are brand agnostic,” she said. “They’re looking for specific amenities: they want a resort with a spa, or a kids program, or a pool, or a golf course.”

And while the hotel industry may be having an easier time getting full-price for their rooms, the business is notoriously cyclical. Another economic slump, a hotel building boom — or both — could turn hotel bookings into a buyer’s market again. And that could once again change the balance of power between hotels and independent travel Web sites.

“When occupancy starts down again, the Internet guys are going to become (the hotels') best friends because that’s where they're going to get their incremental occupancy and keep share in a declining market,” said LeFleur.